The FTSE 100 reflects the value of the top 100 UK-listed stocks. Since the turn of the century, the index hasn’t grown as much as one might think. It’s up around 18% over 23 years.
As an investor during that period, I would have received dividends that will have helped my portfolio grow. But on capital gains, the index has disappointed. Even over five years, the FTSE 100 is only up 1%.
So why is this?
Misfiring index
Firstly, the British index lacks the high-potential stocks that fill the Nasdaq and offer capital gains growth. As a result, many stocks on the index focus on rewarding shareholders.
In recent years, the slow growth of the index could be attributed, in part, to Covid, as well as concerns about the future of the British economy. There’s no hiding from the fact that the economy is growing slower outside the EU. There are also structural issues including a shrinking labour force.
These factors have influenced investor sentiment. And sentiment is an important factor impacting share price growth.
Return to normality?
Could the index buck its recent trend and push upwards? It’s entirely possible, but I think certain issues relating to the UK’s trade relations with the rest of the world need to change. Equally, I’d suggest Britain’s labour market needs to expand — 10m Britons are economically inactive.
Since its inception in 1984, the FTSE 100 has risen at an annualised rate of 5.9%, excluding the impact of dividends. If the index were to return to this annualised growth rate, we’d reach 10,000 in just seven years.
But as noted, we’d need some positive catalysts for that to take place.
Another positive catalyst, and a likely one, is the impact of surging resource stocks. Around 17.5% of the FTSE 100 is made up of resources companies, and they remain a key driver of the index’s returns. The lead index is up 5% over one year, partially due to these surging resource stocks.
Resource stocks have performed well over the past 18 months, driven by intense competition for metals and energy. Metals are going to be an integral part of the electrification agenda and global carbon reducing strategies.
Metals such as iron, lithium and copper are essential to this. As such, stocks such as Glencore, Rio Tinto and Anglo American could drag the index upwards toward 10,000.
Resource stocks are actually under-represented in my portfolio. I certainly missed some good entry points later in 2022, but I’m keeping a close eye on some of these firms, especially Rio Tinto.
What does this mean for me?
I’m optimistic about the index moving forward, and wouldn’t be surprised to see the FTSE top 10,000 over the next decade. But I realise it might not happen as the index has stubbornly refused to rise to 8,000 for years.
Yet I’m anticipating positive catalysts. As such, I could look at index tracking funds, or I can continue to pick my own stocks.
I’m also adding more resources to my portfolio. I think we will see this area outperform in the coming years as we see a shift in the demand dynamics for a host of metals needed to expand renewable programmes. If the index hits 10,000, I believe surging resource stocks will be a part of it.
